How Much Money Should You Put Into Debt?

Almost every American has some kind of debt, whether it’s paying off a house, a college degree, or a new laptop. And aren’t you alone if you’re wondering how much income should be spent on paying off credit cards, car loans, student loans, and / or your mortgage each month?

In general, a good rule of thumb is to pay as much as you can each month above the minimum payment.

“This will not only help you pay off your debt sooner, but it can save you a significant amount of money on interest payments,” says Bola Sokunbi, a certified financial education instructor and author of “Clever Girl Finance”.

Paying more than the minimum may seem obvious, but it’s a good habit to practice if you have extra money. For more specific guidelines for paying off your debt, Select spoke with a few experts to get the best advice.

The 50/30/20 rule is a simple budgeting technique that divides your spending into three categories. It recommends that you spend up to 50% of your monthly after-tax income (also known as net income) on essential expenses (“needs”), such as paying your mortgage, utility bills, food, and transportation. The next 30% should be allocated to your “desires” (eating out, vacationing, etc.) and the remaining 20% ​​will go to your financial goals, either by paying off debts or saving for the future.

Depending on the type of debt you have, you could fall into any of these three categories. Mortgages and vehicle payments, for example, fall into the “needs” category.

“You want to make sure your monthly mortgage doesn’t exceed 28% of your gross monthly income,” Mark Reyes, a PCP and Albert financial advisory expert, tells Select.

Therefore, if you take home $ 5,000 a month (before taxes), your monthly mortgage payment cannot exceed $ 1,400.

He recommends keeping your mortgage payment below 30% of your income to ensure you have plenty of room for the rest of your needs.

If you carry credit card debt, Bruce McClary, a spokesman for the National Foundation for Credit Counseling (NFCC), recommends that you prioritize credit card payments in the “needs” expense category. Carrying a credit card balance month-to-month can get a lot of experience due to high interest charges (usually in double digits), so it’s important to pay it off as quickly as possible.

For those who can’t afford to pay off the full balance of their credit card, McClary advises working toward the goal of allocating 10% of your income to that debt each month.

“Assuming your mortgage or rent will consume most of it [“needs”] category, I recommend keeping credit card payments below 10% of your monthly pay-as-you-go payment if you’re not able to pay off the entire balance each month in an affordable way, ”he says.

Financial institutions analyze your debt-to-income ratio when considering whether to approve new products, such as personal loans or mortgages. To calculate this number, divide your monthly gross income (total income before taxes or other deductions) by the total amount of debt you have (mortgage, credit cards, student loans, and vehicle loan payments). Then multiply by 100 to get the percentage.

For example, suppose your gross monthly income is $ 6,000 and you have $ 3,000 in debt payments each month through your mortgage, car loan, and student loans. The debt-to-income ratio is 33%.

“From a lenders’ point of view, they typically don’t want more than 36% of gross monthly income to be spent on debt, ”says Douglas Boneparth, CFP, president of Bone Fide Wealth and co-author of The Millennial Money Fix.

Don’t stress too much if your debt-to-income ratio is over 36% if you’re considering your mortgage – you’re not alone. The data show that consumers invest almost spending only on non-mortgage debt.

The latest findings from Northwestern Mutual’s 2021 planning and progress study reveal that among U.S. adults over the age of 18 who carry debt, 30% of their monthly income goes on average to pay off debts other than be mortgages. By far, the main source of debt after mortgages are credit cards, which account for more than double any other source of debt.

Like most general rules in personal finance, Boneparth warns that the amount you invest each month in paying off your debt is ultimately subjective. You need to consider your income, the type of debt you have, your savings, and your broader financial goals.

“You may have more motivation to invest your disposable income than pay off your mortgage or student loan debt,” says Leslie Tayne, Tayne Law Group’s debt relief attorney. “But someone else can prioritize paying a car or other high-interest debt, such as credit cards, so they don’t have debts above the rest.”

If you have problems with debt, there are some steps you can take to make it more manageable, such as refinancing your student loans, taking out a debt consolidation loan, or using a balance transfer credit card.

A credit card with balance transfer can help you pay off your credit card balances faster, giving you an interest-free start-up period. The U.S. Visa® Platinum card offers a 0% APR for the first 20 billing cycles of balance transfers (and purchases), so you have more than one year to pay off your credit card debt without accumulate more interest (after 14.49% to 24.49% variable) APR). The 0% introductory APR applies to balance transfers made within 60 days of account opening.

For a balance transfer card that also offers rewards, the Citi® Double Cash Card includes 0% APR for the first 18 months on balance transfers (after 13.99% to 23.99% variable APR). Balance transfers must be completed within four months of opening an account. Cardholders can also benefit from a 2% cash refund: 1% on all eligible purchases and an additional 1% after paying the credit card bill.

There are general guidelines you can follow to help you know if you are on the right track to paying off your debt. In addition to meeting the minimum payments, you can consider the 36% threshold number or work with the 50/30/20 rule.

At the end of the day, however, the amount you invest in paying off the debt comes down to adapting it to your situation and personal financial goals.